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How Long Will the SPAC Boom Last?

By Matthew Frankel, CFP® and Dan Caplinger - Mar 15, 2021 at 6:37AM

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We've seen hundreds of blank check companies formed recently, but how much more appetite does the market have?

We've seen more than 200 special purpose acquisition companies, or SPACs, go public already in 2021. And nearly 400 are in the markets searching for their acquisition targets. In this Fool Live video clip, recorded on March 4, contributors Matt Frankel, CFP, and Dan Caplinger talk about how much longer the SPAC boom could last. 

Matt Frankel: But just to kind of give you a few statistics before we jump into some of our favorites. There are 370 SPACs in the market right now seeking deals that are already public, don't have a target yet, $118 billion of total capital there. They're not all going to be winners, and it's not really showing signs of slowing down anytime soon. I just checked my brokerage account. 20 SPACs have already gone public this week, 210 in 2021 so far, and it's just the first week of March. What do you make of all this? Do you think this is sustainable? Do you think it's going to run out of steam soon or what?

Dan Caplinger: I don't think it's sustainable. Basically what we need to start seeing is, so far when the SPACs were starting to just become popular, there were a bunch of privately held companies that were basically ready and willing to go to be part of the public markets. They want to do IPOs. They wanted to use the reverse merger process. It's facts allow you to use. It's a whole lot easier for them. There's a whole bunch of capital around, so hey, why not do it? So a relatively small number of SPACs chasing a fairly large number of privately held companies wanting to go public, that meant some good deals for the SPACs. But now the SPAC pipeline is full-blast fire hose. At the same time you've started to see sort of a pullback in high-growth stock valuations. Minimal this point, but it's still there, and there's an increasing recognition that the first electric vehicle company is going to get a good reception in the SPAC market. The 10th one got a pretty good one, but the 100th, maybe not so much. As you start working down the quality angle, more SPACs chasing, fewer and fewer good candidates means that the quality of deals might get worse. That mean smaller pops for these SPACs, and eventually, people are going to stop doing them because they're not going to find good deals. They're going to have their money sitting as dead money for two years. Maybe they'll get it back if they invest at the IPO price. Maybe they'll lose some money if they pay more than the IPO price. In the long run, I think that Wall Street is going to do at Wall Street always does. Which is try to jump on a trend too much and play it out more than enough and the latest people to the line are going to end up with some trouble. Doesn't mean there aren't good SPACs out there, just means that you got to be real careful about what you pick.

Frankel: Yes, we're going to talk about some of our favorite ones today. I saw a piece on CNBC today about how SPACs are becoming kind of creative with their deal structures recently. For example, there was one SPAC that was targeting a business in the leisure industry that ended up acquiring a biotech company just because they needed a deal. Things like that are concerning to investors. I would be upset if that happened. If I'm buying a SPAC sponsored by a real estate company, I'm buying that because I want them to use their expertise to find a great real estate company to buy. Not because I want them to buy the next electric vehicle start-up, I want somebody who has expertise in electric vehicles buying one of those. There's going to be a lot of competition for deals. There are some good ones. My thought is about 90% of SPACs should be ignored by investors. There is that kind of margin of safety as Dan just mentioned that $10, if the SPAC doesn't find a deal, investors will eventually get their money back with whatever interested the escrow account has accrued. As long as you're not paying a giant premium, like if you get into a SPAC at $10, there is somewhat of a margin of safety there in terms of being able to find a deal. Now, having said that, that's not to say that SPACs that do you find a deal always go up. It's tough to forget in this past year or so of IPOs like Airbnb and DoorDash, that IPOs don't always go up. IPOs perform poorly all the time throughout history. There is risk in SPAC investing. I'm not saying that at all, but the $10 is somewhat of a margin of safety in terms of being able to find a deal.

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